As a CPA, I am often asked about the tax aspects of Social Security income. Whether you are facing an impending retirement or looking out for someone who is facing this situation, let’s go over some common questions that people ask me.   

What happens if one begins taking Social Security at age 62? Your monthly benefit will be at least 25 percent less compared to the benefit you would receive at your full retirement age, which will be between 66 and 67 years of age. In addition, if you are still working and earn wages of $18,240 or more, you will have to pay back a part of the Social Security you received. For example, if you earn wages of $25,000, you will have to pay back to the Social Security Administration one dollar for every two dollars earned above the $18,240 wage threshold or $3,380. This is not a pleasant experience.

Check with your tax advisor for Social Security rules for the year you will reach full retirement age. After full retirement age is reached, you can earn any amount of wages or self-employment income and it will not affect your Social Security benefits received. If you can wait until 70 years of age to receive social security benefits, your monthly benefit will be greater by about 30 percent than at full retirement age.  

Is Social Security income taxed? For federal purposes, the first 15 percent is not taxed, but depending on the level of your other income, up to 85 percent of your social security benefit received may be added to your taxable income.

Seniors who normally have little to no Social Security benefits added to their taxable income need to be made aware of unexpected tax liability if they receive a large amount of income during the year. This can happen with a large IRA distribution to purchase something and it may cause up to 85 percent of their Social Security received to become taxable as well, a double whammy tax-wise.  

Good news for New York State residents! None of your Social Security received, no matter the amount, is taxed on your state income tax return. In addition, New York State has a pension and IRA exclusion of up to $20,000 for each person over age 59 1/2. So if you are married and each of you received $20,000 or less of IRA or pension income during the year, none of that income is taxed. With the NYS standard deduction of $16,050 for married taxpayers, you can have an additional pension, wage or investment income above your Social Security received and pension exclusions before it is taxed in New York State. For many seniors living in our state, there is no need to move to Florida to avoid high state income taxes in retirement. Just make a winter visit to the Sunshine State instead.

If you have questions on how income in retirement will affect your tax situation, come see Equus Advisors. We are here to help you!